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E&Ps Look to Build Carbon Management Industry

Carbon capture, utilization, and storage (CCUS) has seen growing interest as a strategy to reduce greenhouse gas emissions. The recently increased 45Q tax credit in the U.S. and rising carbon taxes in Canada have meant that CCUS has a better chance to be economical than ever before. Correspondingly, a slate of projects under development could expand North American capacity nearly tenfold. Today’s Energy Market Insight focuses on the role of traditional energy companies, particularly independent E&Ps, in this burgeoning marketplace. A more in-depth report on this topic, including company profiles and economic analysis, will appear in the April edition of BTU Analytics’ Upstream Outlook.

To date, oil and gas companies have played an outsized role in CCUS development. More than half of the approximately 28 Mt/y of existing CO2 capture capacity in North America is sited at natural gas processing plants, and the majority of that CO2 is used in enhanced oil recovery (EOR). However, the CCUS field is likely to become more diverse by the end of this decade with 211 North American projects planned across many industries, ranging from thermal power plants to cement factories. Of course, oil and gas companies will continue to be involved in many of these projects, as can been seen by the yellow-highlighted points in the map below.

Oil majors had previously been a driving force in CCUS development, claiming an interest in 25% of North America’s operational capacity today. However, majors are only attached to 7% of the new capacity under development. While this loss of share is partly due to a swell of projects outside of the oil and gas industry, it can also be attributed to growing interest from other types of oil and gas firms. LNG, midstream, and oil sands operators have all announced plans to massively expand investment in CCUS. Most notably, independent E&Ps have been aggressively announcing new projects.

As these projects have been announced, strategies among traditional energy companies are beginning to diverge. There is a wide variety of potential revenue opportunities within CCUS development, which some firms have grouped together under the heading ‘carbon management’. There are at least six distinct segments of the carbon management value chain that energy companies are pursuing through CCUS:

  1. Capture – Collecting CO2 from an emission source or directly from the atmosphere
  2. Transport – Moving CO2 to its final disposal site
  3. Storage – Injecting CO2 underground for dedicated sequestration
  4. EOR – Injecting CO2 underground to increase oil production
  5. Carbon Direct Removal (CDR) – Removing atmospheric CO2 and selling offsets to emitters
  6. Premium Products – Marketing products as being low-carbon

In addition to announcing more projects than other oil and gas companies, independent E&Ps also stand out for pursuing a wider range of these potential revenue sources. So far, majors have focused mostly on developing point-source capture, largely at their own facilities, and storage sites. In contrast, several independent E&Ps are developing or leveraging existing CO2 pipelines, in addition to capture and storage sites. While majors have sometimes practiced EOR or marketed CO2 for EOR, none appear to be exploring EOR in North America as part of their future carbon management development. Independent E&Ps have shown greater interest in developing secondary revenue streams with EOR, CDR credits, and premium products. At least two independent E&Ps appear especially committed to vertically and horizontally integrating their carbon management businesses to maximize revenue (See table below).

As the CCUS marketplace matures, integration across the CCUS value chain could provide an advantage for these first-mover companies. Yet, it also concentrates risk in a market with significant downside potential. As a few companies race ahead of the pack, many others will be watching to see if the carbon management business is worth the chase. For more analysis, see the April edition BTU Analytics’ Upstream Outlook.

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Nick Jones is an Energy Transition Analyst for BTU Analytics, a FactSet Company. His research areas include carbon management and clean hydrogen industries.

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